Article by Eddie Speed
Today more and more people are attracted to real estate and naturally by extension, real estate investment associations and clubs. Many of these investors are new or “newbie” investors who are easily overwhelmed with information and constantly search for the best way to start. They suffer from paralysis of analysis.
The instructors at NoteSchool each have dozens of years of experience in the real estate investment space. This includes buying real property and mortgage-backed notes. In this article we will use that insight to cut through the “noise” so that you can get started making money in real estate investments by breaking this industry down to the very simple basics.
Two Ways to Acquire Real Estate
As an investor, you can acquire real property by purchasing the property outright or by purchasing the mortgage-backed security and then acquiring the property. Several things will determine which of these two approaches you use. So let’s take a bird’s eye view of these approaches.
Acquire Real Property by Purchasing the Property Outright
In this approach you are directly acquiring the Deed to the property. The goal here obviously is to acquire the property at a discount, in fact the greater the discount the higher the profit. This requires a motivated seller. This type of acquisition is either through a voluntary sale or a legally enforced sale.
A voluntary sale would be simply purchasing the property from a motivated owner/seller. These owner/sellers include:
- Individual motivated property owners
- MLS listed sales
- Disenchanted landlords
- Owners of inherited property
- Property in probate
- Bank and other lender owned property (REO property)
- Bank or other lender approved sales (short sales)
The supply of these types of properties has drastically dwindled in the past year. In fact, RealtyTrac reports that Short Sales have dropped in half in just the past 8 months. In that same time period, REO sales have dropped 25%. It should be noted that the price of these types of acquisitions has gone way up to the point where even seasoned individual investors simply can’t afford to buy and make a decent profit.
In today’s economy, most investors acquire the property through a legally enforced sale. This means that the property owner was negligent on some legally required payment and the party who is suffering the delinquency has filed a legal action for restitution. That’s a fancy way of saying “it’s time to pay the piper”.
These owner/sellers include:
- Auction foreclosure sale for non-payment of IRS taxes
- Auction foreclosure sale for non-payment property taxes (Tax Deed Sales)
- Auction foreclosure sale for non-payment of HOA fees
- Auction foreclosure sale for non-payment of a super lien
- Auction foreclosure sale for non-payment of 1st mortgage
These types of acquisitions are competitive not only with local investors but large institutional investors such as Blackstone and other hedge funds, private equity firms and real estate investment trusts.
Acquire Real Property by Purchasing the Mortgage-Backed Security
In this approach you are acquiring the Deed to the property by purchasing the underlying mortgage debt. The goal here, as always, is to acquire the property at a discount. As stated previously; the greater the discount the higher the profit. This type of acquisition is also through a voluntary sale or a legally enforced sale.
A voluntary sale for this acquisition type would be a relief for the property owner. These owners, looking to get out from under the enormous debt load would:
- Sign a Deed in Lieu of Foreclosure
- Loan modification
A Deed in Lieu allows the debtor to simply walk away from the problem. In fact, right now, the Debt Forgiveness Act allows them to walk away with out any federal tax ramifications. A loan modification allows the qualified homeowner to start making payments once again but on an adjusted loan schedule that they can afford and the debtor agrees to.
An involuntary sale for this acquisition type would be done by simply enforcing the legal documents that the property owner has already agreed to. This acquisition means the investor simply:
- Enforces the Mortgage or Deed of Trust
Owners who simply got tired of waiting for the bank to enforce the mortgage have already vacated many of these properties. The neighbors, city and local county government are happy to see these properties acquired and turned into owner occupied homes once again.
Discount Your Way to Higher Profits
Statistics show that:
- REO and Short Sale acquisitions are being purchased at about 30% discount
- Non-performing mortgage-backed notes are being acquired at about 70% discount
This is where the market is today. In fact, Bloomberg just interviewed 8 of the top financial managers in the world. These top investors run companies that have unlimited funds and virtually every investment asset in the entire worldwide spectrum and yet US non-performing mortgage backed notes was a highly recommended favorite for 2014.
In addition, because the cost of entry level is significantly lower for acquiring mortgage backed notes, investors are finding that they don’t have to go into debt with a high interest acquisition loan such as a hard money loan. In fact, over the past few years we trained investors who were able to acquire properties for less than $5000 (five thousand dollars-not a typo!).
Join us on June 15th and/or June 27th where I will be speaking at the Connecticut Real Estate Investors Association. Get all the details here at www.ctreia.flywheelstaging.com